WSI Corp. is calling for a warmer than normal summer in many regions of the country, which could lead to surging power prices and competition for natural gas supply between electric power generators and gas storage operators. WSI's forecast for August shows warmer than normal temperatures in all regions except for the Northwest.
WSI said some areas could be subject to much warmer than average temperatures, particularly the New York and PJM power markets. "These areas will be subject to heat event exposure following a warmer than normal July, presenting concerns regarding generator availability due to higher levels of forced outages," said consultants at Boston-based Energy Security Analysis Inc. (ESAI) in reviewing the WSI forecast.
"Similar to July, increased natural gas demand will dampen injections to storage and cause concerns over winter inventory builds. This will be supportive for gas prices," ESAI said.
"The latest runs of our forecast models indicate warmer temperatures in the eastern U.S. and cooler temperatures in the Pacific Northwest this summer," said WSI forecaster Todd Crawford. "The magnitude and spatial extent of the heat should increase as summer progresses, after a reasonably benign June."
WSI's predictions differ quite substantially from the forecast of the National Weather Service, which is calling for above normal temperatures during June, July and August in the Pacific region, the Southwest, South Texas, Gulf Coast (except Florida) and most of the Southeast. Below normal temperatures are expected in the Upper Midwest and Northern Plains.
Over the three-month period from June through August, WSI expects below normal temperatures only in the Pacific Northwest and parts of coastal New England.
WSI's monthly breakdown is as follows: In June, WSI predicts there will be warmer than normal temperatures in the Northeast (except for coastal New England), the Southeast (except Florida), the North Central region (especially North Dakota and Minnesota), the Northwest and the Southwest. The only region expected to see cooler temperatures is the South Central.
"Moderately warmer than normal temperature expectations during June should not have a significantly bullish impact on power prices," ESAI said in its analysis of the forecast. "Some increased price volatility may result due to the higher chance for an early season heat event. The warmer than normal temperatures in June will have a moderately bullish impact on gas prices, particularly because warmer weather in June may set up expectations of hot weather in July and August."
The forecast for July calls for above average warmth in the Northeast, Southeast (especially Virginia), South Central and Southwest, with cooler than normal weather in the North Central and Northwest.
In the areas with above normal temperatures, on-peak power demand should be higher, driving up power prices as marginal costs increase to meet higher loads, ESAI noted. "An increased likelihood of major heat events results from the warmer outlooks for these areas. These heat events not only increase demand for cooling but they also stress mid-level units by requiring extended operations. This provides for an increased rate of forced outages, which is an additional bullish factor."
The forecast for August shows continued warmer than normal temperatures in the Northeast, Southeast, South Central and Southwest, as well as the North Central. The only region expected to have cooler than normal weather in August is the Northwest.
WSI's three-month seasonal forecasts have been skillful in eight out of the last 12 periods. A skillful seasonal forecast is defined as one that is closer to what is actually observed than a forecast using the 30-year average temperature.
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